Let to Buy

stemill

We currently have £28,000 left to pay on our existing mortgage. The property was purchased for £52,000 and is now worth around £120,000.

We are looking to buy a new home around the £250,000 mark and have begun to think about keeping hold of our existing property and letting - I think we could get £600 a month.

We're struggling to work out the best way to go about doing this and whether it's a good investment after all the tax, insurance and fees implications are worked through or we'd be better off just selling up and contributing more to a pension.

All ideas welcome!

GMS

Do you have a deposit for the new property or are you looking to raise this on the current property?

Best to speak to a broker to see how the figures pan out.

In terms of being a landlord you would need to ask yourself if you can be bothered to do it. Getting a letting agent to look after it takes away some stress but costs you money each month.

Rental income will need to be declared for tax purposes although mortgage interest can be offset along with other associated costs.

stemill

We would be raising the deposit for the new property on the current property. I'm probably doing the wrong calculation but i think this gives us an LTV of (250 + 28) / (250 + 120) = 75%

stemill

I'm particulary interested in the situation with capital gains tax. If we decided to keep the current property and let it, then decided things weren't going to plan and chose to sell up would we lose a huge chunk of that money to capital gains tax? Is there a clever way to reduce this?

holly_hobby

CGT

As this was your primary residence before it was let, you will have various allowances and reliefs you can apply to your gain (difference between acquisition price and sale proceeds).

For instance, with regards to residency, the period when it acted as your primary residence is excluded from the cgt calculation, as are the last 36 months of ownership (regardless of tenancy). (plus annual cgt exemption and lettings relief, if it is let post your vacation, plus other associated professional/legal costs).

The bare bones are, if you decide letting is not working out for you, and sell within 36 months of you moving out, there is no exposure to cgt no matter what the gain.

If you sell in excess of the 36 mth anniversary, you may as I say apply further deductions/allowances as briefly touched on above - and broadly speaking you will need to have a pretty decent net gain to be stung .... if so CGT on property is charged at 18% for basic rate tax payers, and 28% for higher rate taxpayers.

Releasing equity from the let property to fund 2nd pch

The mortgage interest associated with this further advance on the let property(subject to headroom check) will also be a permitted tax deduction from rental income receipts - this is because HMRC class it as capital withdrawal from the business.

Release of equity is not generally permitted under a consent to let arrangement, so ordinarilly you will need to remortgage onto a buy to let arrangement with either the same or an alternative provider. (all associated costs are also a permitted tax deduction, so keep a record of them).

If you need any more expansion, pop back and ask away !

Hope this helps

Holly

PS - this may help with the basic qs - http://www.hmrc.gov.uk/cgt/property/basics.htm

stemill

Thanks Holly that's very useful. I think we can more or less dimiss CGT for at least 10 years (we've been in the property 12 years already), which is nice :j

So we would need two new loans. A buy to let one for the current property and a normal residential one for the new property.

Is there an optimal way of splitting the amounts between these two loans so as to minimise interest repayments and income tax? Is it just a case of playing about with the numbers and available deals or is there a formula!?

Probably looking at a 20 year term.

holly_hobby

Be sure you understand CGT - the last 36 mths are exempt, as are the yrs when it was your primary residence (you lived there) ..... but any period in between the 2, is not exempt (save for particular circs,) although the reliefs/allowances and exemptions (if let at any time), may take care of any liability arising from any non-exempt period exposure.

ie - you own the property for 10 yrs, you lived there for the first 5 yrs of ownership, before moving out and letting for the remaining term.

First 5 yrs (60mths) are exempt as it was your primary residence (PRR relief)
Last 3 yrs (36mths) are exempt under CGT exemption regs
Therefore we have 8 yrs of a 10 yr ownership exempt, leaving cgt to be assessed over the non-exempt 2 yr period.

Hope that briefly explains how working out what term is exposed.

Using Prop A to Pch Prop B

If you want to maximise your business tax advantages, you take as much equity out of property A to fund the pch of property b (your new primary residence), this is due to the interest element of the mge being a permitted tax deduction - and is a popular way of funding resi purchases where the individual has other high equity BTL interests available.

I should just note that for any future equity release exercise should be carefully measured - as the allowance of mge interest as a permitted deduction is capped at a mge value equal to the value of the property when it became part of the business i.e it started being marketed for let. You can of course release in excess of this, subject to lender criteria and the property having sufficient value/equity, but any mge amount that exceeds the point of entry valuation, is not a permitted deduction and accordingly mge interest applicable to this amount can not be applied against rental income.

To fund the pch of Property B

The equity release exercise on property A will typically be governed by a max ltv of 75% (as a first time landlord), with supporting rental income of 125% of mge interest (using 6% as a ball park calc figure) which may dictate a naturally lower LTV than 75%, with some lenders also having a min earned income of 25k.

As this is unregulated commercial lending, you may effect your new BTL mortgage on a pure interest only basis (which is popular amongst professional landlords as it gives max tax benefits , but note that you will need to plan how to redeem the mge at the end of the term).

You will need to register for self assessment to report your annual net (of deductions) rental income for tax purposes, and as a first time landlord you may want to consider engaging a letting agent to assist in sourcing tenants, referencing etc, at least until you get the hang of the game.

There are lots of responsibilities and legal requirements of a landlord, and on occassion a lot of heartache when it hits the fan, so please ensure you go into this having really done your homework and with your eyes wide open, as to both the positive and not so positive aspects of letting property and dealing with tenants (esp when you may have an emotional tie to your prev home being let x)

Sourcing a BTL mortgage

Given that you will want to source the whole market for the most suitable deals (inc exlusive intermediary only products) for this and your residential borrowing, I would recommend engaging a whole of market broker, whom will facilitate your requests, whilst advising and supporting you throughout the whole application process and beyond (there will generally be a separate fee for their services).

Hope this helps with the basics ........

Holly x

stemill

Thanks again Holly.

I've looked a bit further into CGT and found out about "Letting Relief". This is the minimum of

• The amount exempt by virtue of your residency in the property
• The proportion of gain relative to the time the property has been let
• £40000

This is per person.

So if the current property is worth £252,000 (say) in ten years time then this would be £200,000 gain over 22 years

There would be 12 + 3 years exempt for residency

15/22 * 200,000 = 136,363

Then the proportion of gain over the letting period would be

7/22 * 200,00 = 63,636

Divide by two to get 31,818 gain per person

The exempt amount is the minimum of (136363, 31818, 40000).

Adding all the exemptions together gives

136363 + 31818 + 31818 = 200000

So the full amount is exempt. Am I right?!

With regard's to the BTL mortgage I'm not sure I fully understand the benefit of going interest only. Is it to make sure the interest payment never decreases and so maximise the income tax relief?

As BTL mortgages are generally more expensive than residential ones is there a rule of thumb to determine whether it's better to have more money on the BTL and get the income tax relief or have more on the residential mortgage?

There's more to all this than I realised!

stemill

Doing a few more calculations is making me wonder if this is worth the effort.

Don't fancy crippling myself with mortgage payments, but the equity in our current house just seems begging to put to use! Am I deluding myself?!

bigadaj

stemill wrote: »

Doing a few more calculations is making me wonder if this is worth the effort.

Don't fancy crippling myself with mortgage payments, but the equity in our current house just seems begging to put to use! Am I deluding myself?!

Equity is security, putting that into a btl is risk and leverage.

Think your calculations are a bit generous, you would be doing well to avoid any cgt on an investment property.

Voids will hit your yield, maintenance will. Be a steady cost and you could get a nightmare tenant, all risks to consider.

PasturesNew

stemill wrote: »

.... equity in our current house just seems begging to put to use! Am I deluding myself?!

It'd be put to use if you used it on your new place to sleep soundly at night knowing you own more of the roof over your head - and aren't lying awake in a storm wondering if the other place's roof's sliding off.